LONDON (Reuters) – Brent crude oil prices hit their lowest in more than 11 years on Monday, driven down by a relentless rise in global supply that looks set to outpace demand again next year.

Oil production is running close to record highs and, with more barrels poised to enter the market from nations such as Iran, the United States and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

Brent futures (LCOc1) fell by as much as 2 percent to a low of $36.05 a barrel on Monday, their weakest since July 2004, and were down 49 cents at $36.39 by 1332 GMT.

While consumers have enjoyed lower fuel prices, the world’s richest oil exporters have been forced to revalue their currencies, sell off assets and even issue debt for the first time in years as they struggle to repair their finances.

OPEC, led by Saudi Arabia, will stick with its year-old policy of compensating for lower prices with higher production, and shows no signs of wavering, even though lower prices are painful to its poorer members.

The price of oil has halved over the past year, dealing a blow to economies of oil producers such as Nigeria, which faces its worst crisis in years, and Venezuela, which has been plunged into deep recession.

Even wealthy Gulf Arab states have been hit. Last week Saudi Arabia, Kuwait and Bahrain raised interest rates as they scrambled to protect their currencies.

NO LIGHT AT THE END OF THE TUNNEL

“With OPEC not in any mood to cut production … it does mean you are not going to get any rebalancing any time soon,” Energy Aspects chief oil analyst Amrita Sen said.

“Having said that, long term of course, the lower prices are today, the rebalancing will become even stronger and steeper, because of the capex (oil groups’ capital expenditure) cutbacks … but you’re not going to see that until end-2016.”

Reflecting the determination among the biggest producers to woo buyers at any cost, Russia now pumps oil at a post-Soviet high of more than 10 million barrels per day (bpd), while OPEC output is close to record levels above 31.5 million bpd.

Oil market liquidity usually evaporates ahead of the holiday period, meaning that intra-day price moves can become exaggerated.

On average, in the last 15 years, December is the month with least trading volume, which tends to be just 85 percent of that in May, the month which sees most volume change hands.

Brent crude prices have dropped by nearly 19 percent this month, their steepest fall since the collapse of failed U.S. bank Lehman Brothers in October 2008.

U.S. crude futures (CLc1) were down 26 cents at $34.47 a barrel, their lowest since 2009.

“Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. It’s not exactly looking as if there is light at the end of the tunnel any time soon,” Saxo Bank senior manager Ole Hansen said.

Investment bank Goldman Sachs (GS.N) believes it could take a drop to as little as $20 a barrel for supply to adjust to demand.

Thanks to the shale revolution, the U.S. has been pumping a lot of oil on the cheap, helping to drive down prices to six-year lows and to fill up storage tanks. Indeed, we’re running out of places to put it.

LOOK OUT BELOW

The U.S. has 490 million barrels of oil in storage, enough to keep the country running smoothly for nearly a month, without any added oil production or imports. That inventory doesn’t include the government’s own Strategic Petroleum Reserve, to be used in the now highly unlikely event of an oil shortage. Nor does it include oil waiting at sea for higher prices. The lower 48 states also boast about 4 trillion cubic feet of natural gas in storage — a far bigger cushion than Americans have needed so far during a very warm winter.

For their part, OECD countries (including the U.S.) have nearly 3 billion barrels of oil in storage — or enough to keep factories lit and houses heated in those countries for two months, cumulatively, without added production or imports.

The glut is going to continue worldwide unless some major producers stop pumping. OPEC announced recently that it was abandoning output limits.

So what happens when there’s too much oil to store? Producers will try to rid themselves of it by cutting prices. In that scenario, the price would plummet so far that some producers would shutter their wells altogether — which is, perhaps, the only way that the oil glut will ease.

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My rant – the curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

GET YOUR PORTFOLIO THE HELL OUT OF ENERGY : PRAYER ISN’T AN INVESTMENT STRATEGY Dec.17,2015

I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.

On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge..

OIL Sector Update Dec. 20,2015

Official data show Saudis shipped more crude amid global glut

Saudi output exceeded 10 million barrels a day for ninth month

Saudi Crude Exports Rose in October to Most in Four Months

Saudi Arabia boosted crude exports in October to the highest level in four months, as the world’s biggest oil exporter added barrels to a worldwide supply glut that has contributed to a slump in prices.

Saudi shipments rose to 7.364 million barrels a day in the month from 7.111 million in September, according to the latest figures from the Joint Organisations Data Initiative. The monthly exports were the most since June and 7 percent higher than in October 2014, the data released on Sunday showed. JODI is an industry group supervised by the Riyadh-based International Energy Forum.

Saudi Arabia produced 10.28 million barrels a day in October, up from 10.23 million in September, the JODI figures showed.

Saudi Arabia led OPEC to decide on Dec. 4 to abandon the group’s limits on output amid efforts to squeeze higher-cost producers such as Russia and U.S. shale drillers out of the market. The Organization of Petroleum Exporting Countries had set a production target almost without interruption since 1982, though member countries often ignored and pumped well above it. The oversupply has pushed the price of benchmark Brent crude to almost a seven-year low and triggered the worst slump in the energy industry since the 2008 global financial crisis.

Brent for February settlement dropped 18 cents, or 0.5 percent, on Friday to $36.88 a barrel on the London-based ICE Futures Europe exchange. The crude grade has tumbled 36 percent this year.

Saudi Arabia pumped 10.33 million barrels a day in November, exceeding 10 million barrels in daily output for the ninth consecutive month, according to data compiled by Bloomberg. The Saudis have stuck to their one-year-old view that any output cuts won’t succeed in supporting prices unless big producers outside OPEC, including Russia and Mexico, also participate.

Crude exports fell in October from Iraq and Kuwait, OPEC’s second- and fourth-biggest producers, respectively, according to JODI. Iraq shipped 2.708 million barrels a day, down from 3.052 million barrels a day in September for the country’s fourth consecutive monthly decline, the data showed. Kuwait’s exports dropped to 1.905 million barrels a day in October from 2.008 million in the previous month, JODI said.

Iran, the fifth-biggest supplier in OPEC, exported 1.395 million barrels a day of crude in October, a marginal increase from 1.39 million in September, JODI figures showed

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Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Natural Gas Price Dips on Low Demand for Heating

The U.S. Energy Information Administration (EIA) reported Thursday morning that U.S. natural gas stocks decreased by 34 billion cubic feet for the week ending December 11. Analysts were expecting a storage withdrawal of around 68 billion cubic feet. The five-year average for the week is a withdrawal of around 79 billion cubic feet, and last year’s withdrawal for the week totaled 76 billion cubic feet.

Natural gas futures for January delivery traded up about 2% in advance of the EIA’s report, at around $1.83 per million BTUs, and traded around $1.79 after the data release, the same as Wednesday’s closing price. Last Thursday, natural gas closed at $2.02 per million BTUs, and over the past five trading days that was the posted high for natural gas futures. A new 52-week low of $1.78 was set Wednesday. The 52-week range for natural gas is $1.78 to $3.95. One year ago the price for a million BTUs was around $3.91.

Warmer than normal temperatures are expected to prevail for the rest of this week, but a cold snap is expected in the eastern part of the United States through the weekend. Beginning next week, temperatures in the east are expected to warm up while the west and the northern tier are touted to be cooler than normal. Overall, natural gas demand should be higher through the middle of next week.

Stockpiles are about 16% above their levels of a year ago and about 9.1% above the five-year average.

The EIA reported that U.S. working stocks of natural gas totaled about 3.846 trillion cubic feet, around 322 billion cubic feet above the five-year average of 3.524 trillion cubic feet and 541 billion cubic feet above last year’s total for the same period. Working gas in storage totaled 3.305 trillion cubic feet for the same period a year ago.

Here’s how share prices of the largest U.S. natural gas producers reacting to this latest report:

Exxon Mobil Corp. (NYSE: XOM), the country’s largest producer of natural gas, traded down less than 0.1%, at $79.11 in a 52-week range of $66.55 to $95.18.

Chesapeake Energy Corp. (NYSE: CHK) traded down about 2.7% to $3.80. The stock’s 52-week range is $3.57 to $21.49.

EOG Resources Inc. (NYSE: EOG) traded down about 2.3% to $74.07. The 52-week range is $68.15 to $101.36.

In addition, the United States Natural Gas ETF (NYSEMKT: UNG) traded down about 2.0%, at $7.02 in a 52-week range of $6.95 to $19.38.

Chicago, IL – December 16, 2015 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Chevron Corp. (CVX), Royal Dutch Shell plc(RDS.A), Kinder Morgan Inc. (KMI),ConocoPhillips (COP) and Encana Corp. ( ECA).

Today, Zacks is promoting its ”Buy” stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday’s Analyst Blog:

Oil & Gas Stock Roundup

It was a week where oil prices dropped to levels not seen since Feb 2009 and natural gas futures settled below the $2 level for the first time in over 3 years.

On the news front, Chevron Corp. (CVX) set its investment budget for 2016 at $26.6 billion, down 24% from this year.

Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures dived 10.9% to close at $35.62 per barrel, while natural gas prices plunged 9% to $1.990 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Devon Bets on Crude Even as OPEC Inaction Sinks the Commodity .)

Oil prices encountered the year’s largest weekly drop in reaction to bearish comments from International Energy Agency (IEA) that sees global oil glut to worsen next year in the face of slowing demand growth. Oil was also undone by OPEC’s latest monthly report that showed the oil cartel’s November production rising to a 3-year high.

Related Quotes

Natural gas also fared badly despite a bullish inventory report that showed a larger-than-expected withdrawal. The heating fuel was weighed down by predictions of tepid early-December demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.

Recap of the Week’s Most Important Stories

1. U.S. energy behemoth Chevron Corp. offered a glimpse of its 2016 capital spending plans. The integrated major has pegged its next year’s capital budget at $26.6 billion, down 24% from the $35 billion it expects to invest by the end of 2015. Of the total, roughly 90% will go toward oil and gas exploration projects worldwide, and 8% for downstream businesses.

In a separate press release, Chevron announced the commencement of production from the Moho Bilondo Phase 1b project, located off Republic of Congo’s coast at a water depth of 2,400 to 4,000 feet. Total production from the prospect – in which Chevron holds a 31.5% working interest – will likely be 40,000 barrels of oil every day.

2. Europe’s largest oil company Royal Dutch Shell plc (RDS.A) has received the unconditional clearance from China to proceed with its $70 billion acquisition of BG Group plc − a leading upstream energy player in the UK. The permission clears the final regulatory obstacle that was in the path of Shell’s BG buyout.

Following the green signal from China, the only thing that is left is the approval of shareholders after which the deal will likely be closed by early 2016. However, after getting the Chinese authorization, Shell added its intention to reduce global headcount by 2,800 from the merged entity.

3. The plunge in crude price – from over $100 per barrel in June last year to the recent $35 per barrel mark – has led several firms in the oil industry to take drastic measures to remain afloat. Treading on the same lines, energy infrastructure company Kinder Morgan Inc. ( KMI) announced a cut in its dividend payout beginning with the fourth quarter of 2015. The Houston, TX-based firm plans to lower its quarterly dividend to 12.5 cents, a 75% nosedive from the earlier payout of 51 cents.

Kinder Morgan plans to utilize the funds from the cutback in dividend to fund the equity portion of its expansion capital requirements. This would eliminate the need to tap into external sources for funds to a large extent. Management expects the cut to also translate into a sustained solid investment grade credit rating. The company expects to continue this practice of funding its capital expenditure plans through internal sources in 2017–18 also. (See More: Kinder Morgan Slashes Dividend by 75%, Hits 52-Week Low .)

4. Houston-based energy major ConocoPhillips (COP) released its capital spending budget and operating plan for 2016. The company’s 2016 capital budget of $7.7 billion is 25% below the expected 2015 capital spending and 55% lower than that of 2014. Of the total budget, about $1.2 billion or 16% is apportioned for base maintenance and corporate expenditures, $3.0 billion or 39% has been allocated for development drilling programs, $2.1 billion or 27% has been set aside for major projects. The remaining $1.4 billion or 18% is to be used for exploration and appraisal.

The majority of capital will be used for the development of U.S. oil fields, mainly shale formations in Texas and North Dakota, as well as for the Gulf of Mexico and Alaska. ConocoPhillips also intends to allot drilling capital to Malaysia, China, the North Sea and Canada. (See More: ConocoPhillips Updates 2016 Capex and Operational Plans .)

5. Encana Corp. (ECA) has decided to slash its 2016 capital spending budget by 25% from this year. The Calgary, Alberta-based oil and gas explorer also announced plans to lower its 2016 annual dividend by more than 78%. The announcements were not unforeseen as the company has been hit hard by the persistent weakness in oil price. Following the announcement, Encana fell more than 8% on the NYSE.

The company’s projected 2016 capital budget is in the range of $1.5 billion and $1.7 billion. Most importantly, the majority of the amount will be allocated toward four key oil and natural gas properties that comprise the Montney and Duvernay shale fields in Canada and the Eagle Ford and Permian shale resources in the U.S.

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The key is to give yourself options. They may not love any of the scenarios, but providing choices usually leads clients to eventually embrace one.

Despite solid advice, some clients just spend too much. Others, like the married couple we’ll call Matthew and Elizabeth, diligently save but still run into retirement-planning problems.

Matthew and Elizabeth became clients of Jack A. Bass Managed Accounts a few years back, looking to manage their portfolio and put a retirement game plan in place. At 66, Matthew was considering retiring. Elizabeth could finally travel now that she was no longer the primary caregiver of her mother, who had passed the year prior. Together, we looked at their joint financial picture and analyzed the situation.

Then came some bad news: They wouldn’t be able to confidently cover living expenses if Matthew stopped working. They were shocked, because they’d done so much correctly—worked hard, lived within their means and consistently saved for retirement, putting away $2.3 million between retirement and non-qualified investments. Matthew even ran some preliminary retirement numbers online over the years to make sure they were on track.

Part of the problem was that Matthew’s planning assumptions were too rosy. He didn’t assume he’d have any variability on his portfolio returns, he didn’t assume he’d have health-care costs once Medicare kicked in, and he didn’t assume that retirement could last more than 20 years.

We projected that if Matthew retired at 66, the couple would only have about a 70 percent chance of being able to cover lifestyle expenses without having to make adjustments to spending over time; if either of them experienced a modest long-term care event that ate into their resources, they would achieve only a 65 percent success rate.

Their miscalculations aside, the other part of Matthew’s and Elizabeth’s retirement problem was that they, like many other people, put others’ needs before their own, in traditional “sandwich generation” style.

When their kids asked for help with down payments on houses, they obliged. When Elizabeth’s mom needed in-home help for a few years prior to her moving in with them, they covered it. Consequently, these unforeseen events ultimately put their retirement in jeopardy.

Working toward a solution

Matthew and Elizabeth weren’t happy to hear they weren’t on track to retire, but they appreciated having a framework from which to choose their solution.

Ultimately, Matthew chose to work 30 hours per week so that his company could continue to pick up their health-care costs (saving them about $1,000 a month in Medicare-related costs). The part-time work allowed him to take off every Friday, and that gave him the added benefit of “test driving” retirement.

He and Elizabeth also decided to downsize their home and buy long-term care coverage. The LTC insurance assured that their children wouldn’t be faced with the possibility of someday having to assist them financially.

As with all best-laid plans and good intentions, sometimes things go awry with retirement planning. However, by exploring alternative saving tactics, you can still achieve your goal.

Investment Management

Offered by Jack A. Bass Managed Accounts

We can administer your account via the internet so that you can track your returns and only you can transfer funds from that account.

Guaranteed Investment Performance

( minimum 6 % annual return) Or You Don’t Pay

Our stock market letter : www.amp2012.com

Information must proceed action and that is why we offer a no cost / no obligation inquiry service.

The main intention of our website is to provide objective and independent information that will help the potential investor to make his own decisions in an informed manner. To this effect we try to explain in a simple language the different processes and the most important figures involved in offshore business and to show the different alternatives that exist, evaluating their pros and cons.

On the other hand we intend – in terms of offshore finance, bringing these products to the average citizen.

Do something to help yourself – contact Jack A. Bass now !

A final word of advice – information without action will produce nothing in the way of improved investment returns.

There was a recent video / interview of Jim Cramer saying his industry sector guru called $ 20.00 as the bottom but Cramer saw the stock in free fall and just did not know.

Analysts have been split on whether Kinder Morgan’s dividends are sustainable as the pipeline industry’s ability to tap equity and debt markets to finance growth dimmed. The company’s stock has slumped 27 percent this week to $17.47 as of 12:34 p.m. in New York. Moody’s Investors Service warned on Tuesday that Kinder Morgan’s bonds were on the verge of tipping into junk.

“Dividend growth is unrealistic,” Vivek Pal, a managing director at Jefferies LLC in New York, said in a note to clients before the announcement. The company needs a 50 percent dividend cut to avoid being downgraded to junk, he said.

Prior to today’s announcement, Kinder Morgan had been expected to lift its 2016 dividend to $2.14, according to Bloomberg Dividend Forecasts. Companies across the oil and gas industry have been slashing or freezing dividends to conserve cash as plunging energy prices choked off money needed to drill wells, pay debts and purchase drilling rights.

Transocean Ltd., Chesapeake Energy Corp. and Linn Energy LLC are among those whose investors have seen payouts halted amid the crunch that began 18 months ago. Kinder Morgan’s $40 billion-plus debt burden exceeds the economic output of entire nations, including Bolivia and Bahrain.

We have no oil / gas stocks in the managed accounts.Braggin ‘ Rights – out of Chesapeake at $22

We have no shipping stocks – Summary from Seeking Alpha

Dry bulk shipping unlikely to recover before 2017, consultant says
Dec 3 2015, 19:15 ET | By: Carl Surran, SA News Editor Contact this editor with comments or a news tip
Dry bulk shipping faces at least another year of pain, according to a new report from Drewry Shipping Consultants, which says companies in the industry will not return to profitability until at least 2017.Drewry says its dry bulk freight rate index fell 14.5% in September from August, and rates have fallen another 13.8% between September and November, although numbers for the full Q4 will not be available until early next year.”Demand has almost dried up,” Drewry’s lead analyst says. “China’s iron ore imports have stagnated, China’s coal imports have come down massively and India’s coal import growth has also slowed down.”Drewry forecasts demand for iron ore growing at 3%-4% over the next few years, but says demand for coal, especially in China, will not rebound any time soon.Related tickers: DRYS, SBLK, SALT, DSX, PRGN, EGLE, NM, NMM, SB, SINO, SHIP, FREE

The key is to give yourself options. They may not love any of the scenarios, but providing choices usually leads clients to eventually embrace one.

Despite solid advice, some clients just spend too much. Others, like the married couple we’ll call Matthew and Elizabeth, diligently save but still run into retirement-planning problems.

Matthew and Elizabeth became clients of Jack A. Bass Managed Accounts a few years back, looking to manage their portfolio and put a retirement game plan in place. At 66, Matthew was considering retiring. Elizabeth could finally travel now that she was no longer the primary caregiver of her mother, who had passed the year prior. Together, we looked at their joint financial picture and analyzed the situation.

Then came some bad news: They wouldn’t be able to confidently cover living expenses if Matthew stopped working. They were shocked, because they’d done so much correctly—worked hard, lived within their means and consistently saved for retirement, putting away $2.3 million between retirement and non-qualified investments. Matthew even ran some preliminary retirement numbers online over the years to make sure they were on track.

Part of the problem was that Matthew’s planning assumptions were too rosy. He didn’t assume he’d have any variability on his portfolio returns, he didn’t assume he’d have health-care costs once Medicare kicked in, and he didn’t assume that retirement could last more than 20 years.

We projected that if Matthew retired at 66, the couple would only have about a 70 percent chance of being able to cover lifestyle expenses without having to make adjustments to spending over time; if either of them experienced a modest long-term care event that ate into their resources, they would achieve only a 65 percent success rate.

Their miscalculations aside, the other part of Matthew’s and Elizabeth’s retirement problem was that they, like many other people, put others’ needs before their own, in traditional “sandwich generation” style.

When their kids asked for help with down payments on houses, they obliged. When Elizabeth’s mom needed in-home help for a few years prior to her moving in with them, they covered it. Consequently, these unforeseen events ultimately put their retirement in jeopardy.

Working toward a solution

Matthew and Elizabeth weren’t happy to hear they weren’t on track to retire, but they appreciated having a framework from which to choose their solution.

Ultimately, Matthew chose to work 30 hours per week so that his company could continue to pick up their health-care costs (saving them about $1,000 a month in Medicare-related costs). The part-time work allowed him to take off every Friday, and that gave him the added benefit of “test driving” retirement.

He and Elizabeth also decided to downsize their home and buy long-term care coverage. The LTC insurance assured that their children wouldn’t be faced with the possibility of someday having to assist them financially.

As with all best-laid plans and good intentions, sometimes things go awry with retirement planning. However, by exploring alternative saving tactics, you can still achieve your goal.

Investment Management

Offered by Jack A. Bass Managed Accounts

We can administer your account via the internet so that you can track your returns and only you can transfer funds from that account.

Guaranteed Investment Performance

( minimum 6 % annual return) Or You Don’t Pay

Our stock market letter : www.amp2012.com

Information must proceed action and that is why we offer a no cost / no obligation inquiry service.

The main intention of our website is to provide objective and independent information that will help the potential investor to make his own decisions in an informed manner. To this effect we try to explain in a simple language the different processes and the most important figures involved in offshore business and to show the different alternatives that exist, evaluating their pros and cons.

On the other hand we intend – in terms of offshore finance, bringing these products to the average citizen.

Do something to help yourself – contact Jack A. Bass now !

A final word of advice – information without action will produce nothing in the way of improved investment returns.

The U.S. E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the U.S. economy, according to Paul Merolli, a senior editor and correspondent for Energy Intelligence, an energy sector news and analysis aggregator. Merolli’s report calls out the over-leveraged, under-hedged U.S. E&P sector, which has been trying to keep up appearances over the past 12 months by slashing operating costs and capex to keep production costs lower than oil prices.

But experts believe that lower costs and improving efficiency won’t be enough for the sector as it grapples with some $200 billion-plus in high-yield debt, which the U.S. E&P sector used to finance the shale oil boom. According to Standard and Poor’s, there have already been 19 U.S. energy sector defaults so far in 2015, while another 15 companies have filed for bankruptcy. The default category also includes companies that have entered into “distressed exchanges” with their creditors.

Moreover, a Nov. 24 report from S&P Capital IQ titled “A Cautionary Climate” shows that the total assets and liabilities of U.S. energy companies filing for bankruptcy protection have grown in each quarter of 2015, and the third quarter was no exception with assets totaling more than $6.2 billion and liabilities totaling more than $8.9 billion. Each quarter of 2015 was larger than the total for all U.S. energy bankruptcies in 2014.

U.S. E&P Sector: Junk rating

According to Energy Intelligence, Standard & Poor’s applies ratings to around 100 E&P firms. Of these, 77% now have high-yield or “junk” ratings of BB+ or lower, 63% are rated B+ or worse, and 31% or 51 companies are rated below B-. Companies rated B- or below are effectively on life support, while those rated C+ are “maybe looking at a year, year-and-a-half before they default or file for bankruptcy,” according to Thomas Watters, managing director of S&P’s oil and gas ratings, speaking to Energy Intelligence.

High-yield E&Ps are expected to see negative free cash flow of $10 billion during 2016, even after all the recent capex cuts and efficiency measures. Unfortunately, capital markets are closing rapidly to new E&P debt issues. Last year, the U.S. E&P sector raised $29 billion from 44 issuances of public debt in 2014, but this year only $13 billion has been raised across 23 issuances, almost all of which occurred during the first half of the year.

What’s more, the U.S. E&P sector is woefully under-hedged. Energy Intelligence’s data shows that small producers have 27% of their oil production hedged at an average price of $77/bbl, mid-sized firms have 26% hedged at $69, and large producers have just 4% hedged at $63.

U.S. E&P sector: a final lifeline

It is believed that the U.S. E&P sector will really start to cave in April when banks are due to start their next review of borrowing bases. Borrowing bases are redeterminedevery six months, and banks use market oil prices to calculate the value of company oil reserves, which companies are then able to borrow against.

Haynes and Boone’s Borrowing Base Survey is predicting an average cut of 39% to borrowing bases when the next round of revaluations take place. In September, The Financial Times reported on a research note from Bank of America which pointed out that only a fifth of “higher-quality” energy companies had used up more than half of their borrowing base capacity. For junk-rated companies, however, it’s a different picture. Citi points out that only 21% of the junk-rated energy companies it covers have any borrowing base capacity left at all.

So with borrowing bases set to fall at the beginning of next year and capital market access drying up, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward. Another source of concern for E&Ps and their lenders are price-related impairments and asset write-downs which have already amounted to $70.1 billion so far this year, compared to the $94.3 billion total for the previous 10-year period of 2005-14. And there could be further write-downs on the horizon:

“Year-to-date, there has been $70.1 billion in asset write-downs in 2015, approaching the $94.3 billion total for the previous 10-year period of 2005-14, according to Stuart Glickman, head of S&P Capital’s oil equities research. And he expects even more write-downs and impairments to emerge at year-end. “Companies are putting this off for a long as they can. You don’t want to be negotiating in capital markets with a weakened hand,”

“Chesapeake Energy, one of the largest US independent producers, shocked earlier this month by indicating a $13 billion reduction in the so-called PV-10, or “present value,” of its oil and gas reserves to $7 billion. Had Chesapeake used 12-month futures strip prices — instead of Securities and Exchange Commission-mandated trailing 12-month prices for PV values — the value would’ve fallen to $4 billion.” — Source: Energy Intelligence, “Is Debt Bomb About to Blow Up US Shale?“

This conclusion is also supported by research from S&P Capital IQ:

“Using data from SNL Financial, we looked at natural gas-focused companies across the value chain to see whether there is a relationship between their level of revolver usage and their forward multiples. Within this subset of companies, exploration and production (E&P) companies have the greatest usage of their revolving credit facilities — 57% on average, excluding those with either no revolving credit or no usage on their revolving credit lines. As of late September 2015, this sub-industry also had a forward EBITDA multiple of about 6.2x.” — Source: S&P Capital IQ, “A Cautionary Climate.”

E&P sector waiting for a bailout

All in all, it looks as if the U.S. E&P sector has a rough year ahead of it, but for strong companies with investment-grade credit ratings, next year could become an “M&A playland” according to Energy Intelligence. The six-largest integrated majors together hold a war chest of some $500 billion, and there’s a further $100 billion in private equity sitting on the sidelines.

Whatever happens, it looks as if the U.S. E&P sector is about to undergo a period of significant change.

It won’t be easy, you’ll think it strange
When I try to explain how I feel
That I still need your love after all that I’ve doneI had to let it happen, I had to change
Couldn’t stay all my life down at heel
Looking out of the window, staying out of the sun

Venezuela is urging the Organization of Petroleum Exporting Countries to adopt an “equilibrium price” that covers the cost of new investment in production capacity, Del Pino told reporters Sunday in Tehran. Saudi Arabia and Qatar are considering his country’s proposal for an equilibrium price at $88 a barrel, he said.

OPEC ministers plan to meet on Dec. 4 to assess the producer group’s output policy amid a global supply glut that has pushed down crude prices by 44 percent in the last 12 months. OPEC supplies about 40 percent of the world’s production and has exceeded its official output ceiling of 30 million barrels a day for 17 months as it defends its share of the market. Benchmark Brent crude settled 48 cents higher at $44.66 a barrel in London on Friday.

“We cannot allow that the market continue controlling the price,” Del Pino said. “The principles of OPEC were to act on the price of the crude oil, and we need to go back to the principles of OPEC.”

OPEC ministers will meet informally on Dec. 3 in Vienna, a day before the group’s formal session, he said.

This Oil Bust Will Change The Energy Industry Forever

Although demand for oil and gas will continue for decades to come, it will gradually diminish as renewable energy sources rise. A lot could happen between then and now. The International Energy Agency (IEA) and many other credible parties continue to forecast that our growing world population from 7 billion people today to 9 billion by 2050 will need much more energy – in particular as most of these people will aspire a life like we have here in North America. So it is no wonder that Abdalla El-Badri, Secretary General of OPEC has recently said that if producers don’t invest in new oil and gas supply, we could see oil prices as high as $200 a barrel. On the other hand, there is Bob Dudley, CEO of BP, who believes we won’t see $100 oil again “for a long time”.

Innovation in the oil industry, particularly the North American revolution in the hydraulic fracturing of tight oil reservoirs, has changed oil supply dramatically. With smaller, more flexible capital-light projects and shorter lead times, fracking has enabled greater adaptability to volatile market conditions. The outlook for shale oil and gas could be just as strong in many places in the world. Even if the shale boom proves tough to replicate (due to factors such as regional differences in geology, regulation and incentives to land owners), in many cases bringing new technologies to mature fields will help keep supply up and dampen the increase in oil prices.

Sluggish demand is another important factor keeping oil prices from rising. Not just from disappointing growth in China, but also in North America. Car ownership in the Western world has started to drop in the past decade, especially among young people. Based on the early success of Tesla and arrival of car sharing companies like Car2Go and Uber, and the entry of AppleAAPL +0.83% and GoogleGOOGL +0.13%in the autonomous-driving car game, there’s reason to foresee a future where not everyone has a personally owned internal combustion engine at their disposal. Change is slow however: a truck or bus and many gasoline fueled cars sold today will of course drive somewhere in the world for the next 30 to 40 years. Hence, some demand for hydrocarbons will continue.

The financial sector is a third factor inhibiting the rise of oil prices. While we already see many financial institutions divesting from hydrocarbon stocks to the tune of $2.6 trillionbecause of social and environmental pressure, the recent speech by Bank of England Governor Mark Carney is further going to influence the willingness of large financial institutions to continue to invest in traditional hydrocarbon projects in the future. One of the most significant risks Carney focused on in his speech is transitionary cost, the cost of write-offs for traditional hydrocarbon assets if countries are indeed getting serious about phasing out hydrocarbons. Even while the target date for a 100% carbon free society is only 2100, we expect that policies will likely start having significant implications in the next decades. The message is that “Sustainable Innovation” may become key to future energy financings and that oil and gas companies will have to innovate much more than they do today in order to survive as energy-producing Fortune 500 companies in the decades to come.